New withholding tax rules
Do you use contractors to provide services to your customers?
There are some significant new withholding tax rules that apply from 1 April 2017 which can have an impact on the withholding obligations for businesses engaging contractors to perform services in addition to labour-only building contractors.
What do the existing building contractor withholding tax rules apply to?
Anyone engaged as a contractor within the building/construction industry may be subject to withholding tax. Labour only contractors are those that are typically engaged to perform certain building services, but who supply little or no products or materials.
When do the new labour-hire rules apply, and at what rates?
From 1 April 2017, labour-hire firms must withhold tax from payments to their contractors, including payments to their contractors’ companies. The default rate of withholding tax is generally 20% for this new category of withholding. However, contractors may elect any rate above 10% and they may apply to the IRD for a lower rate.
Who do the new labour-hire rules apply to?
Your business will be one of labour-hire:
• If you arrange for ‘others’ to perform services (brains and/or brawn related) directly for your clients; and
• You are paid for supplying the others – as opposed to being paid for what others do for your client; and
• Doing the above represents one of your main (that is, not incidental to any other) activities
Does sub-contracting make your business labour-hire?
Subcontracting does not, in itself, make your business a labour-hire firm. If the client has a house and they wish to have a room added then they can employ and pay a contractor to do so. This is not a “labour-hire” situation because there is no arranging involved. If the contractor sub-contracts a third party then this is still not a labour-hire situation because the contractor has contracted to supply an outcome, being a room added to a house.
Does contracting to supply labour make you a labour-hire firm?
Arranging the supply of labour is likely to be defined as a labour-hire arrangement and therefore the contractors supplied may be subject to the new withholding rules.
If the client has a house that they wish to add a room to they might approach a firm to find some builders. In this case, the firm meets its obligation by supplying people with building or construction skills and the firm is a labour-hire firm, if that activity is one of that firm’s main activities.
Is part of your business covered by the new rules?
Examples where the new rules apply are businesses providing planning, training, construction, and other such services. Essentially any service-related business could be a labour-hire firm, depending on the arrangements between the business, the client and the contractor.
Contractor v labour-hire
A labour only contractor engaged by a construction company will be subject to withholding tax as a building contractor. A contractor engaged by a construction company (Build Co) which then subcontracts them to another construction company, is likely to be a labour-hire arrangement. Whether or not this is a main activity of Build Co then determines whether withholding tax needs to be deducted from the amounts paid to the contractor.
We can’t cover every scenario here, but we can assist you to understand whether you need to be concerned. For more information please contact us.
By Stuart Ruddell - Crowe Howarth, Senior Accountant